Addressing Delinquency Amongst Microfinance Borrowers

November 9, 2010

Microfinance is about providing financial services to people who would otherwise not have access to it through the formal financial sector. In Fiji, specialized microfinance institutions (MFIs) provide small loans to microentrepreunerswho need more capital for their businesses. Ideally, the borrowers invest the money and then repay their loans and interest on time, making a larger pool of money from which others can benefit.

However, the reality is far from this ideal. Delinquency, or when the borrowers fail to repay their loans on time, is a challenge with which many microfinance institutions in Fiji have to deal.

A recent study of five MFIs in Fiji, conducted by the Pacific Financial Inclusion Programme (PFIP) revealed that since the beginning of 2009, the total amount of loans offered has declined affecting the potential for MFIs to earn revenue this year as they have a smaller pool of money to lend. Further, the loans that were extended were not being paid back on time, with between 15%-85% of loans at different MFIs having repayments delinquent by over a month. This means that to keep lending at a similar level in coming years, a donor or the government will have to give money to the MFIs to replace the money lost in bad loans. This is unsustainable, and signals that urgent action needs to be taken since global best practice indicates that delinquency rates should be kept below 5% to ensure effecting functioning of MFIs.

Dorinda Work, Manager of the Microfinance West Unit in Fiji realises that delinquency management is an important area of work in which MFIs in Fiji need to engage. She studied this topic during a three week intensive course on microfinance, at the 16th annual Boulder Microfinance Training Program, held in Turin, Italy, which was attended by 325 microfinance practitioners from over 85 countries. Dorinda was amongst a group of seven Pacific Islanders to attend the training and her attendance was supported by a scholarship from the MasterCard Foundation and PFIP.

One of the requirements of her scholarship was that she share her knowledge on delinquency management with other practicioners, which she did at a MFI manager’s workshop, jointly organized by the National Centre Small and Microfinance Enterprise development (NCSMED) and the Microfinance Unit.

“I feel that delinquency management is currently the most important issue that needs to be discussed seriously among microfinance practitioners in light of the recent developments in the microfinance industry in Fiji. The core issue facing MFIs is sustainability and this, I believe, begins with the effective management of the MFIs largest asset, the loans portfolio,” said Dorinda.

Her presentation covered topics such as the causes and consequences of delinquency, the cost of delinquency, measuring delinquency and actions that need to be taken to address delinquency.

She said some participants were not aware of the causes and costs of delinquency and one participant admitted that his MFI has not had any training on managing delinquent loans, provisioning for loan loss and how the portfolio at risk (PAR) ratio is used to measure the quality of an MFI’s loans portfolio.

The workshop concluded with a set of concrete actions, one of which includes staff attachments with larger MFIs, ensuring hands- on learning.

“After attending the Boulder Microfinance Training, I now have a broader knowledge of microfinance and have learnt that microfinance provides an avenue to effectively extend financial inclusion by empowering the marginalized members of the communities wherein we serve, creating opportunities to innovate and get involved with income generating activities. It is also true that the microfinance members need to have access to other services apart from savings and loans; which include insurance and money transfers,” said Dorinda.

MasterCard Foundation also sponsored Lavenia Baro, representatives from the Fiji Council of Social Services Microfinance Unit. Representatives from Central Banks including Owen Kose (Bank of Papua New Guinea), Iosefo Bourne (Central Bank of Samoa), Noel Vari (Reserve Bank of Vanuatu), Neumi Usumaki (Reserve Bank of Fiji), Raynold Moveni (Central Bank of Solomon Islands) also attended the Boulder Training, supported by scholarships from the European Union and PFIP to learn more about designing regulation that preserves the financial security of their countries, while creating an enabling environment for extending financial services to low income and rural populations.

PFIP is funded by the Australian Agency for International Development (AusAID), United Nations Capital Development Fund (UNCDF), European Union, and the United Nations Development Programme Pacific Centre.